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Our Guest today is Charlotte berer founder of the institute for private investors and author of the book wealth
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management unwrapped uh Charlotte thanks so much for joining us today I'm delighted to be here with you mle great
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so you say in the introduction to the book that it really grew out of your experiences creating an educational
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Community for investors and advisors can you tell us a little bit about how the book came about as a result of your
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experiences in creating this community it's so interesting when you think about Investors and advisors
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because so often they're put at loggerheads and they're each protecting and not wanting to be sold in the case
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of investors and in the case of advisors needing to sell something or be seen as
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very smart so I noticed that the dialogue wasn't quite as candid and open and addressing the real issues that
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needed to be addressed and so teaching private wealth management at important and also having
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the content at The Institute for private investor forums allowed me to try to break down that wall that existed
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between the two and improve the way they related right now is there a case to be
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made for whether uh investors need advisors in the first place uh or can can't wey
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investors just be the CEOs of what you call my wealth Inc uh and manage their own money they certainly can and part of
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what is in my book is a way for an investor to decide whether he's the CEO and can do it all but I use the analogy
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of a real CEO let's say as a CEO you have to buy a telecom system and youve do you go down and actually do the
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switches and routers yourself or do you know enough to delegate that and hire someone else who can put it in so I
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think that's the distinction and each investor knows their management style as
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a CEO they're going to either be very Hands-On or they'll be slightly less
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Hands-On more of a really smart delegator you also compare to renovating your kitchen right renovating your kitchen
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how many times I mean I feel this you go into Home Depot and you think okay what
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size what am I doing how could I renovate a kitchen as I walk into Home Depot I'd be overwhelmed on the other
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hand some people know exactly what they're buying and they're almost like
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contractors or Carpenters or very skilled Craftsmen they love being in Home Depot
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they know exactly what size Lumber and cabinets to get right uh going back to the question of uh advice versus a
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different approach whether or not a CEO or a wealthy investor is Hands-On uh there are people who believe that
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passive indexing uh a passive approach based on indexing is better than trying to second guess the market because you
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diversify your risk so much more uh by just spreading it out across the entire Market what do you think are the pros
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and cons of that approach well what I describe in the book is the danger of thinking that wealth management and
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being the CEO is just about investing and picking one strategy putting it on autopilot and going away I call that not
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delegating but abdicating so in terms of passive versus active I think most investment
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professionals would really agree that the key is asset allocation so even if you're all passive
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you still need to be aware of how you're allocating and life changes you may have
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one allocation at this age or in these circumstances and quite another later in your life and that's where an advisor
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can come in or not depending on how you see your own needs so let's say uh an
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investor decides not to abdicate but to delegate uh to an advisor what are some of the most important considerations in
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choosing an advisor and and especially how how do you avoid advisers who may be too salesy in their
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approach well it's hard because some of the best salese are very very appealing
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and compelling you want to work with them and yet you're being in an oldfashioned word you're being snowed
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and a lot of investors are lary of that so so the most important pieces I believe that I detail in my book are
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this you need to know what kind of investor you are first and foremost and then you really need to set out your
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needs and your outcomes what are you really looking to do with this wealth what's the purpose of it and then how
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are you going to judge whether you've hired the right advisor or not now all
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of these exercises are ones that you can and should do with an advisor and guess
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what more than one because in the interview process if you take your time and really hear more than just one
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wonderful salesman you'll begin to get very Discerning and can see who's really
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talking about risk and return in a way that not only you understand that's going to suit your own personal needs
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and goals right you recommend something called a five PS exercise tell us about that that's where investors can both
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learn but also be incredibly blindsided the five PS are in somewhat uh oversimplified the components of an
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investment or an advisory firm and that's the philosophy what they believe in their values the process how they
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make their decisions the performance which of course is their returns and then also the people and then lastly the
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fees spelled pH EES so if you take a pie of 100% And you a portion among those five and you overweight one that's going
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to be the place where you're most vulnerable to being too captivated so if people is everything you're going to
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pick a firm with people like you People Like Us syndrome I call it if you think it's performance and you put 50% on
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performance you're going to keep hiring and unfortunately keep firing firms who
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have hot hands that suddenly go cold MH so what's the best way to hedge your
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risk uh in in uh how you choose an adviser practice makes perfect interview four five have the same exact questions
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for each firm give them start them all on a Level Playing Field I think I shared one story where this one advisor
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came in and had this incredible track record beginning in March of 2009 to the week before the meeting with the
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Prospect and of course it looked great however the other three firms they were interviewing weren't giv the same chance
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to use that exact same timeline so that really can be very deceiving but having a system such as I
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suggest in my book and doing the exact same questions with each of the contenders is a much fairer beauty
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contest than saying we're going to have a beauty contest for apples and we're
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going to have apples bananas and pears all and bananas everybody can come into it but how are you going to make a
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decision great one of the most uh I would say interesting areas between advisers and investors the question of
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fees uh what are your thoughts on uh uh what's the right way for investors to
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know what the right level of fees uh should be paid for advice there are two things here that I
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think are really critical fees are first the explosion waiting to happen in our industry the more transparency comes to
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the four the more more investors are losing faith and trust in the industry because fees are kept hidden so that's
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number one but number two investors can ask are you being paid directly or indirectly for what you're suggesting I
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buy tell me that puts you as the investor immediately as a more informed questioner and lastly um we did a study
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with W knowledge at Wharton together where we showed that if you can show fees in
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context and that means here's our fee for you and here's how our competitors
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how they charge at different levels of wealth that chart if you ask for it from a potential advisor will not only show
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them that you're well informed but will also give you a wonderful context for
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realizing whether this is a fair fee because if you go for the cheapest provider that may look very alluring the
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problem is you may get what you pay for and be missing some other aspects of advice that you really are going to come
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to want and depend on you know I remember that thank you for bringing up that study that we had done that IPI and
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knowledge at Wharton had done together I think with State Street several years ago uh one of the very interesting
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aspects of that study I remember was that uh advisor thought that investors trusted them at this level was while
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investors actually trusted them at a much lower level uh what does that tell you about uh the value of trust uh
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especially in the aftermath of the financial crisis and how can the trust be established between investors and
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advisers trust is the glue that holds any investor advisor relationship and creates the partnership
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trust is the glue and it's a word people misuse and short change all the time I would
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say that the way to develop that trust is to create metrics for valuing the advice and create a report card so that
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you can say here's what we said we do here's what your goals are here's how
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we're doing versus your goals and that builds trust trust is not an instant earning trust is something that gets
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shown over time being predictable I can rely on this advisor but you know what it's a two-way street the advisors if
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they are professional as well they need to expect investors to be trustworthy to
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share the information that will help them do a better job for their family and so often it's both sides are being a
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little less than candid right so do you see trust primarily as a matter of of metrics or as a matter of communication
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or both it's definitely both it's Communications on a foundation of real
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metrics the classic error is that too many advisers will say in an interview oh we help you sleep better at
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night but what does that mean and the first time an investor hears that they go oh thank goodness I finally found an
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investor that an adviser that will help me sleep better at night I don't think
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so they begin to realize it's a cliche so how do you do that is the question so
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it's all about Communications and unfortunately the investment industry speaks a language of its very own that
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is merely a separator and I believe creates mistrust right you know one of the things I found very interesting
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about your book is that you identify these four major risks that can send uh an investment strategy off the cliff uh
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what what are those risks and how can investors guard against them well this was actually um the work of a man by the
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name of Jeff Davy from phom metrica in Australia and he said too often we look at risk it's just standard deviation or
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the required risk the one that we chart and that Wharton professors are always citing but there are three others that
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are equally important and one is risk tolerance which is more of a personality characteristic another is the perceived
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risk how does the investor see the world today are they panicked by last week's
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volatility for instance on the stock market and then so it's risk required risk risk tolerance perceived risk and
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then the um risk that they can take because of who they are how old they are what they can expect in the future so
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that's just the risk situation that they're in right know one of the people
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I I I uh you invest you quote in your book is someone who complained that when he asked his
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advisor about the time the adviser told him how to make a watch uh uh tell us how uh advisor should communicate with
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investors about risk and other issues without bombarding them with so much detail that they put them to sleep yeah
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well that's where I believe emotional IQ comes in and many many investment professionals have a dir of emotional or
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EQ they have a huge amount of IQ and so what smart advisers do is they try to figure out who in their firm can do the
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conversation or the dialogue that determines the personality of the investor sitting across the table and
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too often they just bring the entire dictionary and say here or the entire instruction manual and say here not
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realizing that each investor sitting across from them has a different hunger interest
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curiosity but one thing holds true across all investor types and that is show me the picture show me whether it's
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a mon Carlo simulation or a risk return chart that shows how much risk did you have to take to get that much return a
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simple chart a simple graphic is going to be compelling to any investor uh how should investors measure
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their advisor performance and when is the and and and when is the right time to know that it's time to let an adviser go
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okay well that's two big questions um how to measure your advisor and then how
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to know whether it's time to fire um well let me start with the last question
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um an investor came to me right after the crisis and said my adviser lost me so much money Charlotte I want to fire
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him right away and I need to hire somebody right away and can you give me three names and of course I said no I
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can't give you three names but I will give you a system for looking at how you're going to do this and I said the
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first and most important thing is include your current adviser whom you're about to
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fire in the competition for your assets going forward and guess what using a the
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system of questions that I gave him he ended up hiring the adviser he was about to fire because suddenly the adviser
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gave him a context for understanding the performance he'd had and he actually did
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better than most endowments most investors most pension plans and he hadn't realized that when you broke down
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the asset classes and how they performed versus a benchmark so all of those things came into play now you might ask
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why didn't he get given all of that by his advisor without having to ask well
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the evolution of our industry is such that the more investors and advisors talk the more advisers realize oh our
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clients really want this now back to your first question how should you measure your advisor that's something I
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believe you decide before you hire the adviser and before the adviser lets you hire them and you may think that's odd
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why am I saying let's the more discovery about expectations what is our outcome what is
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our risk Target what are returns are we looking for when do I want to get a call
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from you when do I want to get an email how often do I want to meet with you and
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then each and every meeting you're looking at the metrics that you set before you even hired it and it really
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starts with the investment policy statement and a statement of goals purpose of the money well let me ask you
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one last question uh let's assume that in this room with us right now we have
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one investor and one advisor what's the one piece of advice you would give to
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each of them about how to optimize their working relationship dare to say it [Laughter]
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and what I mean by that is the investor needs to dare say I don't understand
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what you're talking about or I'm not happy with the relationship manager I've
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been assigned might you think of someone different or I don't feel comfortable in
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this market and on the advisor side she or he needs to dare to say we're not
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always going to agree we're not always going to agree you say you want this report done this way but if you want my
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firm to remain profitable and in business we cannot customize every report for every client so they both
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need an extra dose of Courage Charlotte thanks so much for speaking with knowledge at whorton
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you're very welcome [Music]